On Wednesday the Hon Stephen Jones, Assistant Treasurer, announced that the Government would “clarify current arrangements in legislation that will mean crypto assets will not be regarded as a foreign currency for tax purposes”.
This would be retrospective, applying from 1 July 2021.
Whilst this is certainly welcome news to the crypto community, taxpayers as well as their tax agents and lawyers - how certain can we be come tax time?
An uncertain position
Despite the evolving nature of the crypto economy, there has been limited movement in the Commissioner’s position with respect to Bitcoin falling outside of the definition of foreign currency.
TD 2014/25 Income tax: is bitcoin a ‘foreign currency’ for the purposes of Division 775 of the Income Tax Assessment Act 1997? makes clear the Commissioner’s position on Bitcoin and similar cryptocurrencies:
As bitcoin is not a monetary unit recognised and adopted by the laws of any other sovereign State as the means for discharging monetary obligations for all transactions and payments in a sovereign State, it is not 'foreign currency' for the purposes of Division 775 of the ITAA 1997. – at [33]
There certainly are debates around the arguments presented by the Commissioner therein, however we saw a similar outcome by McCabe DP in Seribu Pty Ltd and Commissioner of Taxation (Taxation) [2020] AATA 1840 at [28]-[30]:
… I must follow the established rules of statutory interpretation that are applicable to domestic legislation. Those rules require me to begin with the language of the section in the context of the Act as a whole. It would be a mistake to rush straight to the explanatory memorandum for guidance.
29. I have already pointed out the expression ‘foreign currency’ is defined in s 995-1 as “a currency other than an Australian currency”. While the definition is expressed awkwardly, the meaning is clear enough: the reference to “an Australian currency” is plainly a reference to the unit of exchange established in the Currency Act, and the reference to “[an]other currency” must be interpreted in light of that comparator. It follows the “other currency” in question must be an official currency issued or recognised by a sovereign state.
30. Even if I accept the ordinary settled meaning of the word ‘currency’ now extends to cryptocurrencies, context makes all the difference.
The problem being, what has followed since the TD was released and the AAT case, are sovereign states doing just that - recognising Bitcoin as legal tender. Most notably El Salvador, as described in the Government’s media release.
Despite this, the Commissioner has remained steadfast on their 2014 position. Relevantly, McCabe DP noted that the incorporation of Bitcoin into the foreign currency regime is a matter of law reform.
This has left many who are actively engaging in crypto in uncertain positions.
Wednesday’s announcement is the express exclusion of Bitcoin from the foreign currency regime.
There is certainly an air of positivity. Joni Pirovich, who is a leader in the blockchain and digital asset space, highlights the clarity this announcement offers in her LinkedIn post here. In particular, Joni Pirovich notes that those seeking to rely on the foreign currency rules (that trump the CGT regime) for the 2022 tax year have been stopped in their tracks. There is now clear expectations that the CGT regime will apply.
The hope is that this announcement will be the first of many to come.
What can we expect?
Will this be a targeted amendment that whilst adding to the complex web of legislation offer an immediate benefit of certainty?
It could well be.
Reflecting on the role of common law and Kirby J’s analogy of it being an unruly garden - ‘messy, imprecise and unfocused’, I previously summarised (citations omitted):
This is due not only to the complexity in the law itself, but also the complexity that arises through the diversity in circumstances to which law must be applied. This includes changing factors and/or circumstances over time, as well as the way in which community standards influence law. The judiciary fulfils an important role in addressing the boundless circumstances that may arise that cannot be captured by legislation, responding to novel circumstances, extending existing rules as necessary, and establishing the limits or validity of legislation. – Morton et al., 2021, p.85
Moreover, as Heydon AC noted, precedent can preserve past wisdom and experience, whilst ensuring prudence in changing law.
Could this have been achieved through a test case on the matter thus avoiding the need for legislative change?
This would clearly come too late and at what cost?
Like all things and reflecting on French CJ, there is a challenge in balancing the role of the judiciary and the legislature. There is certainly concern in adding to legislative complexity.
What this does do is make a clear statement of recognition by the newly enacted Government that this is an uncertainty that needs clarification.
This is progress.
What will be even more fascinating is how the Government achieves this. Some discussion has suggested it will be through amending the definition to exclude overseas sovereign states recognising currency – instead requiring those jurisdictions to issue them.
With the crypto economy in a deep winter, a bear market, taxpayers are potentially sitting on significant tax losses. The distinction in treatment between the foreign currency regime and CGT regime will likely isolate these losses.
What does this reform not do?
This announcement does not attend to the multitude of issues that have created substantial uncertainty with respect to taxation.
The distinction between activities being of a business nature as opposed to relating to investment or speculative assets remains. The application of trading stock provisions or the CGT regime will continue to be challenging.
The multitude of issues with respect to DeFi remain.
As well as issues with respect to staking and mining. Airdrops. Bridging. To name a few…
This is a real step by the Government towards recognising and actioning change to respond to the complexity and uncertainty in these novel crypto activities.
To see movement in this regulatory landscape is a positive step.
Targeted reform can create confidence and certainty for taxpayers about compliance with their tax obligations. No doubt that there is a need to balance the government’s revenue targets and reduce the risk of revenue leakage. Moreover, any such reform should ensure taxpayer rights are protected. However, there is a need for simplicity and robustness for our increasingly digitally driven economy. - Morton
This announcement is hopefully the first of many moves by the Government to ensure clarity for taxpayers, tax practitioners and lawyers.
Hello 30 June :)
TLDR: Blockchain has made understanding tax cool